Thursday, June 10, 2004

Stealth Outsourcing

Hemmed in by labor contracts with United Auto Workers and perhaps sensing the public's distaste for outsourcing and the attendant bad publicity, the Big Three Automakers have hit upon a new strategy. Force their suppliers to outsource. The automakers bring prices they can get in China to their suppliers and use those as the benchmark. They threaten their domestic suppliers with going directly to the Chinese if they can't meet the price. Of course the differences are so great that the only way the suppliers can meet the price and keep the business is to move their own manufacturing to China or buy subcomponents there. From this morning's WSJ (subscription):

Both GM and Ford acknowledge that Chinese auto-parts suppliers now serve as global "benchmark" prices for quality and price on certain components, such as electric-wire cables, radios, speakers, small motors, and even brakes, suspensions and aluminum wheels. The prices reflect China's average wage costs of 90 cents an hour, compared with $22.50 in the U.S., according to Roland Berger Strategy Consultants of Munich, Germany.

"It's Economics 101, Adam Smith," Ford President Nick Scheele says in an interview. "It's the law of comparative advantage." He says the benchmark component prices Ford is asking suppliers to match these days represent "optimal" prices, and can come from anywhere in the world, including China.

You read that correctly; 90 cents and hour. You can be sure that wage does not include any kind of retirement plan or health plan. Rest assured, too that no pesky environmental laws restrain the pollution of the communities where these parts are made and no OSHA rules get in the way of keeping Chinese workers in high-pressure, long-hour, dangerous working conditions.

The results of the pressures on the parts and accessories supply industry is devastating. Think about the following numbers, then think about other industries doing similar things. Then think about the people behind those numbers. The next statistic could be you.

According to a recent study of parts suppliers by Roland Berger, 133,000 jobs, or 16% of the labor pool, in the American parts industry have disappeared over the past four years as parts suppliers cut costs by improving productivity or shifting jobs to lower-cost countries such as China and Mexico. By 2010, the same study predicts a further 127,000 jobs, or 18% of the 707,000 remaining, will disappear or move overseas, says Andreas Mai, the author of the Roland Berger study.